Superannuation is a very effective investment structure for Aussie investors to make passive income returns at a lower tax rate.
The tax rate of investment earnings for individuals, trusts and companies may be higher than the tax rate of investment returns inside superannuation.
Another bonus of the super set-up is that, in most cases, we won't access the money for many years, promoting the idea of long-term investing inside superannuation. Investing for the long-term gives us the best chance that an investment will play out positively.
I'd say that receiving passive income is one of the best elements of owning shares. It requires virtually no additional effort to receive money into our bank account once we hold that investment.
Why is superannuation important for passive income? Less tax in super means losing less of the passive income return to tax.
Outside of super, a full-time working Australian could lose a third (or more) of the passive income return to tax, which makes that type of return less appealing.
Superannuation looks significantly more appealing, in my view, given how much lower the tax rate is during the asset accumulation phase of life when compared to a full-time individual's tax rate.
It could get even better in retirement, where a person's superannuation tax rate may be 0%. You can't get a tax rate lower than that!
Of course, every Australian's tax position is different, so we'll just look at the particular income goal from here and ignore the tax rates.
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How much is needed in superannuation for $90,000 of annual passive income?
Being paid $90,000 in dividends each year sounds amazing to me. I'm a very long way from that goal, but I would like to reach that annual dividend target eventually.
Australians need to think about what sorts of investments they want to own and the dividend yield those investments provide.
I believe ASX shares are the best pick for passive income. That's partly because the franking credits attached to dividends from Australian companies are an excellent addition to the return.
What's actually required to earn $90,000 annually depends on the dividend yield of the portfolio.
For example, a portfolio with a 5% dividend yield would need to be $1.8 million in size, while a dividend yield of 7% would need to be $1.29 million in size.
The required portfolio size varies significantly in size, so it depends on the sorts of investments we make in our portfolio.
The types of ASX dividend shares I'd buy
There are a number of high-quality ASX dividend shares that Aussies can buy for yield, such as quality operating companies, listed investment companies (LICs) or real estate investment trusts (REITs).
In my view, Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) may be the strongest choice for reliable and rising dividends, but it has a relatively low dividend yield.
Some of the businesses I like with a dividend yield around 5% includes Telstra Group Ltd (ASX: TLS), APA Group (ASX: APA), Rural Funds Group (ASX: RFF), Centuria Industrial REIT (ASX: CIP), MFF Capital Investments Ltd (ASX: MFF) and L1 Long Short Fund Ltd (ASX: LSF).
My favourite ideas with an expected dividend yield of around 7% (or more) include WCM Global Growth Ltd (ASX: WQG), Future Generation Australia Ltd (ASX: FGX), Future Generation Global Ltd (ASX: FGG), Charter Hall Long WALE REIT (ASX: CLW), Dexus Industria REIT (ASX: DXI), WAM Microcap Ltd (ASX: WMI), WAM Leaders Ltd (ASX: WLE) and Hearts and Minds Investments Ltd (ASX: HM1).
These aren't the only compelling ASX dividend shares for superannuation investors to consider, but I think they're a great place to start.
